2018 (11) TMI 1974 - AT - Income Tax

Estimation of income - non-genuine purchases - CIT(A) has restricted the disallowance upto 5% - HELD THAT - We are inclined with the decision of ld.CIT(A) that the purchases have been made by the assessee but not from the parties whose invoices have been obtained. We find justification in the findings of the ld.CIT(A) that the assessee might have inflated his purchases by taking the invoices from the suppliers of the bogus bills. It is not reasonable to treat the entire purchases as bogus and AO has not disapproved the genuineness of the corresponding sales made by the assessee. In the light of above facts and legal findings, as elaborated in the decision of ld.CIT(A), we do not find any error in the decision of CIT(A) for restricting the disallowance of 5% of the bogus purchases for assessment year 2013-14. Accordingly, the appeal of Revenue is dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the disallowance of 25% of the total purchases as bogus by the Assessing Officer (AO) is justified.
Whether the restriction of disallowance to 5% by the Commissioner of Income Tax (Appeals) [CIT(A)] is appropriate.
Whether the evidence provided by the assessee is sufficient to substantiate the genuineness of the purchases.
Whether the AO's failure to reject the books of accounts impacts the legitimacy of the disallowance.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of 25% Disallowance by AO

Relevant legal framework and precedents: The AO disallowed 25% of the purchases based on information from the Investigation Wing indicating that the assessee received accommodation entries for bogus purchases. The disallowance was made under the provisions of the Income Tax Act, 1961.
Court's interpretation and reasoning: The Tribunal noted that the AO did not find any defects in the books of accounts nor did he reject them. The AO also failed to provide the assessee with the material and statements used to make the addition.
Key evidence and findings: The assessee provided purchase bills, confirmation of account, and stock register, claiming transactions were through banking channels.
Application of law to facts: The Tribunal observed that disallowing 25% of the purchases would lead to an abnormally high gross profit, which is unreasonable in the assessee's line of business.
Treatment of competing arguments: The Tribunal considered the AO's stance but found the CIT(A)'s reasoning more convincing.
Conclusions: The Tribunal concluded that the AO's 25% disallowance was excessive and not justified.

Issue 2: Appropriateness of 5% Disallowance by CIT(A)

Relevant legal framework and precedents: The CIT(A) relied on precedents from similar cases where disallowances ranged from 3% to 5%.
Court's interpretation and reasoning: The CIT(A) reasoned that while there were doubts about the genuineness of the purchases, the entire amount should not be treated as bogus. The CIT(A) noted that the purchases were likely inflated but not entirely fictitious.
Key evidence and findings: The CIT(A) found that the purchase invoices matched the stock register and sales records, indicating actual transactions.
Application of law to facts: The Tribunal agreed with the CIT(A) that a 5% disallowance was reasonable given the circumstances and legal precedents.
Treatment of competing arguments: The Tribunal considered the Revenue's argument for a higher disallowance but found the CIT(A)'s decision to be more balanced.
Conclusions: The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 5%.

Issue 3: Sufficiency of Evidence Provided by Assessee

Relevant legal framework and precedents: The onus is on the assessee to substantiate the genuineness of their transactions.
Court's interpretation and reasoning: The Tribunal found that the assessee provided sufficient documentary evidence, including purchase bills and stock registers, to support its claims.
Key evidence and findings: The evidence indicated that the transactions were recorded in the books and routed through banking channels.
Application of law to facts: The Tribunal noted that the AO did not disprove the genuineness of the sales, which supported the assessee's position.
Treatment of competing arguments: The Tribunal acknowledged the AO's concerns but found the evidence provided by the assessee credible.
Conclusions: The Tribunal concluded that the evidence was sufficient to substantiate the genuineness of the purchases.

Issue 4: Impact of AO's Failure to Reject Books of Accounts

Relevant legal framework and precedents: The rejection of books of accounts is a significant factor in determining the legitimacy of disallowances.
Court's interpretation and reasoning: The Tribunal noted that the AO did not reject the books of accounts, which undermined the justification for the disallowance.
Key evidence and findings: The AO neither found defects in the books nor rejected them.
Application of law to facts: The Tribunal found that the absence of rejection of the books was a critical factor in determining the reasonableness of the disallowance.
Treatment of competing arguments: The Tribunal considered the AO's position but emphasized the importance of the books' acceptance.
Conclusions: The Tribunal concluded that the AO's failure to reject the books weakened the case for a higher disallowance.

3. SIGNIFICANT HOLDINGS

Verbatim quotes of crucial legal reasoning: "We find justification in the findings of the ld.CIT(A) that the assessee might have inflated his purchases by taking the invoices from the suppliers of the bogus bills. However, it is not reasonable to treat the entire purchases as bogus and AO has not disapproved the genuineness of the corresponding sales made by the assessee."
Core principles established: The Tribunal established that disallowances must be reasonable and supported by evidence. The failure to reject books of accounts is a significant factor against large disallowances.
Final determinations on each issue: The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 5% of the purchases, dismissing the Revenue's appeal.

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